MNI POLICY: BOJ To Maintain Guidance On Covid Worries

The Bank of Japan is wary of the threat to Japan's economy from slower global growth but is unlikely to move away from a focus on Covid impacts in its forward guidance over the short-term, MNI understands.

The slowdown in overseas economics has gathered pace since the BOJ board considered its medium term outlook in July, though worries about Covid outbreaks dampening Japanese and Chinese activity are expected to remain a top concern.

When the BOJ refers to "the impact of Covid-19” it specifically means the impact from surges in Japanese Covid-19 cases on private consumption, and the effect of China's "zero-Covid" policy on its supply chain. (See MNI POLICY: BOJ To Lift FY22 CPI Forecast; Trim Growth View)

Weaker demand and the supply-side disruptions caused by China's lockdowns will dampen global demand and Japan’s exports and production, which in turn will increase downside risks to Japan’s economy.

If China maintains its “zero-Covid” policy, the BOJ will not lower its guard relating to concerns about the impact of Covid-19 on the economy. The bank will not change its forward guidance for the policy rates, including its easing bias. (See MNI POLICY: BOJ Wary Of Slow China Recovery, Fed Hike Impact)

Even if domestic Covid concerns abate, the BOJ will continue to monitor Covid-19 in China and its impact on the global and Japanese economies.

NO NEED FOR CHANGE

At least two BOJ board members voiced concern over the impact of Covid-19 at the last board meeting, arguing for no change to forward guidance at the September 21-22 meeting.

“Although other risks, such as a slowdown in overseas economies, certainly affect policy decisions, COVID-19 has remained a significant risk, and thus there is no need to change the current wording of forward guidance,” one member said, according to the meeting's summary of opinions.

A different member said: “Given that the course of COVID-19 is still uncertain and that the inflation rate is highly likely to decelerate from fiscal 2023, it is desirable to maintain the easing bias in the current forward guidance.”

However, if Japan’s economy is hit by a significant slowdown of overseas economies, led by a weaker U.S. economy and volatile financial markets next year, it will increase pressure on the BOJ to tweak the primary focus to overseas economies.

Despite rapid rate hikes by the Federal Reserve, the U.S. economy has remained solid except for ongoing weakness in housing markets triggered by higher rates.

It is unknown how much the Fed will need to raise its policy rate, not only to lower inflation rates but to also raise the unemployment rate. It is also uncertain how quickly tighter monetary policy will slow the U.S. economy amid uncertainty over the Fed's terminal rate.